Time to Buy Nokia’s Promising Future

Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A lot has been said and written about Nokia (NYSE: NOK) in the past few months -- most of which has been negative -- and it would take a superhuman effort for followers of the stock to make sense of it all.

On one side, we are fed with stats that show Windows Phone 8's market share is steadily growing, albeit at the expense of Symbian, while on the other hand, Nokia’s performance in the market continues to underwhelm and investors cannot understand why the stock continues to remain the black sheep of mobile and tech stocks.

It’s an open secret that Nokia is currently struggling to regain its foothold after losing out a huge proportion of its market share to smartphone titans. Here is a snapshot of how Nokia, with its Windows Phone 8 market share (4.6% market share in the U.S.) and Symbian (0.3% market share in the U.S.) stacks up against the leading mobile phone companies:

  • Apple and its iOS hold 39.1% market share in the U.S.
  • BlackBerry holds 0.7% market share in the U.S.
  • Google, with its Android OS, commands a leading 52% market share in the U.S.

Nokia has posted losses in seven out of the last eight quarters, and this obviously doesn’t go down well even with the firm’s die-hard proponents. Is there any reason to believe Nokia will emerge from this maelstrom and reverse the seemingly never-ending cycle of under-performance?

I strongly believe that Nokia might very well do exactly that; in fact, I’m strongly of the opinion that the company is on an inflection point and now is a good time for a contrarian investor to start looking for entry points on the buy side of Nokia’s stock.

Granted, an equity investor has to carry out his own due diligence and crunch the numbers before settling for any stock. But, to pick winning or promising stocks, you need to be more than a sophisticated bean-counter; you have to do a lot more than pore through volumes of a company’s quarterly and end-of-year reports mining thousands of data points.

If you are to be successful in investing in a company such as Nokia, you need to ensure that can stay liquid as the highly irrational markets search for the stock’s true value. In short, look beyond standard profitability metrics. Here are a few solid reasons why Nokia is set to surprise its skeptics and naysayers in the coming months:

1. Growing Nokia Lumia sales

2013 is probably the year when Nokia will make its much-awaited turnaround. Its Lumia 500 series, EOS, and 928 are all in the pipeline and are set to make their debut in 2013. Nokia has tended to be conservative with the production of its new phones in the recent past. J.P Morgan, however, revealed that Nokia has adequate capacity to sell 45 million phones in a phone’s 18-month cycle from birth to market, and this means supply will no longer be a thorny issue as it has been in the past.

Lumia sales came in at 7.2 million phones in the last quarter and sales are expected to grow 27% QoQ. This may not seem like much compared to Apple’s 45 million plus sales, but still is a significant improvement and looks to keep up the trend in coming months. Nokia will manufacture more Lumia phones than has ordinarily been the case in recent times, and this will help the company reach out to more markets than before. Below is a snapshot of Lumia sales in the past few years.

<img alt="" src="http://g.fool.com/editorial/images/54714/nok1_large.jpg" />

1. Asha acceleration

Nokia’s Asha smartphone has had a bumpy ride in recent times; 9 million units sold in Q4 2012 followed by a near 50% drop to just 5 million units in Q1 2013. The release of Asha 105 and 200 series is expected to provide some boost to Nokia’s Asha platform.

Nokia’s management expects the Xpress browsing apps and the $20-phone segment to even out matters for both Asha and the company’s Mobile Phone Segment. Google Trends for emerging markets, where Asha and Nokia’s low-cost feature phones are popular, reveals that Asha and Lumia are receiving plenty of search activity using popular keywords.

<img alt="" src="http://g.fool.com/editorial/images/54714/nok1_1_large.jpg" />

Searches using “Nokia” and “Asha” as keywords as well as major rivals in developing economies grew as follows QoQ:

<table> <thead> <tr><th> </th><th> <p>Asha</p> </th><th> <p>Nokia</p> </th><th> <p>iPhone</p> </th><th> <p>Samsung</p> </th></tr> </thead> <tbody> <tr> <td> <p>India</p> </td> <td> <p>33%</p> </td> <td> <p>+20%</p> </td> <td> <p>+5.8%</p> </td> <td> <p>+3.75%</p> </td> </tr> <tr> <td> <p>Cote D’ Ivoire</p> </td> <td> <p>No Data</p> </td> <td> <p>-8%</p> </td> <td> <p>-12%</p> </td> <td> <p>-8%</p> </td> </tr> <tr> <td> <p>Brazil</p> </td> <td> <p>0%</p> </td> <td> <p>-11%</p> </td> <td> <p>-13%</p> </td> <td> <p>+5%</p> </td> </tr> <tr> <td> <p>Nigeria</p> </td> <td> <p>+42%</p> </td> <td> <p>-8%</p> </td> <td> <p>-10%</p> </td> <td> <p>0%</p> </td> </tr> <tr> <td> <p>South Africa</p> </td> <td> <p>-25%</p> </td> <td> <p>-13%</p> </td> <td> <p>-22%</p> </td> <td> <p>0%</p> </td> </tr> <tr> <td> <p>Ethiopia</p> </td> <td> <p>No Data</p> </td> <td> <p>+14%</p> </td> <td> <p>-10%</p> </td> <td> <p>-7%</p> </td> </tr> </tbody> </table>

This is a sample of the countries where Nokia's legacy mobile phones and Asha traditionally sell like hot cakes. Estimates for the coming quarter for Asha and Nokia’s low cost phones stand at more than 7 million. The introduction of ultra-cheap $20 handsets is expected to significantly increase Nokia’s sales in South America and Africa, in particular, where mobile phone sales growth currently outstrips all other regions.

1. Nokia-Siemens Networks

Nokia recently announced that it will pay $2.2 billion to buy Siemens' (NYSE: SI) stake in the Nokia-Siemens joint venture. This will give the company full control of the 50-50 venture. The early phase of NSN was riddled with financial troubles and many analysts doubted if the venture would ever show a clean pair of heels. Lately, however, NSN has begun generating cash and is showing clearer signs of financial stability, helped by its sharp focus on mobile broadband. Nokia will pay Siemens $1.56 billion in cash and the rest as a secured loan to be paid one year after the deal is actualized.

Nokia’s detractors have raised a furor on the move questioning the effects it will have on Nokia’s already stretched cash flow (cash burn rate in Q1 2013 came in at a blistering $760.5 million).

Although these concerns are genuine, what’s even more important is the cash generation qualities of NSN. We can expect to see operating profits for the coming quarter (Q1 2013 Operating Cash Flow less Investing Activities stood at $310.7 million). 

2. Microsoft deal

There are ongoing rumors that Microsoft (NASDAQ: MSFT) is considering buying out Nokia’s phone unit. Microsoft is a respected software titan, but a newcomer in the hardware business with its Surface Tablet. Microsoft’s modus operandi has always been to partner with hardware manufacturers such as Nokia and have them install their software on their devices.

Although the rumored deal between Nokia and Microsoft is quite unlikely at this point, it is likely to be beneficial for both companies if it actually materializes. Microsoft will get an entry-point into the lucrative smartphone market while Nokia can use the Windows Phone 8 OS to get a respectable market share in the business.

Nokia’s achilles heel

With so much good news invariably comes a little bad news. Nokia’s tight liquidity is a major area of concern for investors. The company burnt through $760.5 million in cash last quarter and has near-term cash outflows in excess of near-term inflows (negative working capital). Accrued expenses currently stand at 110% of revenue (compare that to Apple’s 30% or BlackBerry’s 62%).

Nokia’s weak cash position might force the company to make a rights issue in a bid to raise cash to finance its operations. This is a near-term risk for Nokia.

Looking forward

Although Nokia’s poor cash position needs to be addressed in a hurry by its management, investors need not lose sleep over it since it is to be expected from a company just beginning to recover from a traumatic trading period and looking to expand its market share. As such, keep an eye on Nokia.

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Muhammad Bazil has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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